What The Rolling Stones Can Teach You About Making Profit

What The Rolling Stones Can Teach You About Making Profit

At an age when they should (or we just wish they would) hang up their leather trousers and retire, more and more ancient rockers are embarking on yet another tour with The Rolling Stones top of the list. 

Prior to Covid, The Rolling Stones (of course!), Madonna, The Who, Neil Young, Rod Stewart, Pearl Jam, Queen, and even Ringo Starr were all performing on stages around the globe. Given that many of them are nearing or way past grandparent-age, you might wonder why they’re still bothering so many years after their first taste of fame. 

The performers will say it’s because they love it and that they ‘don’t want to let the fans down.’ But there’s another hard-nosed reason to get their weary old bones back on the tour bus. And it’s this: touring boosts their profits in a way that digital music sales and royalties can no longer do. 

“With digital music so freely and widely available, hardly anyone makes money off sales or royalties these days,” reported Mike Rowell in an article for Forbes. 

Top performers can take home 35% of the night’s gate sales and up to 50% of the money made from merchandise sales, according to Forbes’ journalist, Peter Kafka. Their record labels are likely to receive none of that, which means the stars are likely to receive a whopping payout for their performances.  

Singing aside, what can you learn from the likes of Mick Jagger when it comes to your business? 

To focus on the part of your business that brings the most profits. The Rolling Stones could have retired decades ago and waited for the income from album sales and royalties to trickle in. Instead, they made the decision to continue to tour and have generated many millions as a result. In just under three years, for example, the band’s overall concert grosses topped $401 million, according to Billboard. 

The following story also illustrates why it makes sense to focus on the most profitable part of your business.  

A major US direct marketing company with over $1 billion in annual sales recently reviewed its database to determine where its profits were coming from, B2B or B2C. At that time, 50% of its sales were to consumers and 50% to businesses. I was shocked to discover that the profits on the business sales were 500% better than those to consumers. Most consumer sales weren’t even profitable even though they represented the majority of customers, transactions, and expenses. 

The decision was made to focus on B2B sales. It required a significant turnaround in the business: at that time, the company employed 500 people taking inbound calls from customers and only 100 people making outbound calls to businesses. 

The change took two years. By the end of that period, 95% of its sales were to businesses and only 5% to consumers. Sales flourished. They had been growing at 21% before the turnaround but by the end of the two years averaged 50%. Profit growth was equally dramatic. 

So, what can you do to boost your profits besides cutting costs? For a start, identify your most profitable customers and then do everything possible to increase sales to that segment of your business. Focus on attracting more customers like them.   

Want further reading on profit? We outline 3 of the 4 factors for increasing profit in our blog Critical Factors For Improving Profit 

Fortunately, it’s not something you have to do alone. A part-time CFO (Chief Financial Officer) will help you to accomplish a more profitable company with less stress and hassle than if you were to try to do it on your own. Watch our 3-minute video on How it Works,  which explains the part-time CFO model from the CFO Centre. 

 

Photo by Clem Onojeghuo from Pexels

What is the North Star?

What is the North Star?

In the 1950s, strategic planning was around budgetary planning and control, then we jumped to 1970s which focused on corporate planning; 1980s focussed on strategic positioning, 1990s strategic competitive advantage; 2000s strategic and organisational innovation; 2010 complexity and rapid change.

Now, we are talking about North Star Metrics (NSM). The term has been in around since the 2000s and was used primarily in Silicon Valley. It has taken a while to reach Perth.

Here is our view of what the North Star means for SMEs.

If you are not familiar with North Star, it is another form of goal setting. Remember SMART goals (specific; measurable; achievable; realistic; and time-based)? And what about vision boards, or stepping stone goals or even a more recent fad of bullet journaling?

A North Star goal, in its basic form, has also been referred to as the Big Hairy Audacious Goal. It is a goal so big, so far out there and it is not about the destination but more about the journey.

One article recommends to think of them “the way sailors view the North Star: A way to stay on course, no matter where you are. And if you don’t know where to go or what to do, all it takes is a quick glance to get back on track”.

If that is the basic form, let’s have a look at the metric in more detail.

Key steps for creating a North Star Metric

North Star Metric

1. Start by Understanding How Customers Get Value

And not just any customers, but instead the “must have” customers who say they would be “very disappointed” if they could no longer use the product. Your goal is to expand this “must have value” across your existing and new customers. Your North Star Metric is how you quantify expansion of this value.

2. Should be Possible to Grow NSM “Up and to the Right” Over Time

A good rule of thumb is to choose a metric that can be “up and to the right” over a long period of time. This is why “Daily Active Users” is an example of a good NSM for consumer products like Facebook or online games.

3. Consider the Downsides of a Metric

Think through some scenarios where growing the metric could lead the team to behave in ways that are against the long-term interest of the business. For example, if you made your NSM “average monthly revenue per customer,” then the fastest way to grow this number would be to eliminate all customers that have a relatively low value — even if they are profitable customers. This would likely reduce your overall customer and revenue growth rate.

4. Keep it Simple

Remember that the point of the NSM is to align everyone on your team to work together to grow it. So, it’s important that it is simple enough for everyone to understand it and recall it.

5. Why Not Just Focus on Revenue Growth?

Revenue growth is very important, so this is a natural question that many people, especially business owners, ask. The challenge is that if revenue growth outpaces growth in the aggregate value that your product delivers to customers, it will not be sustainable. Revenue growth will eventually stall and start to decline. But if we can continue to grow aggregate value delivered to customers over time, then it becomes possible to sustainably grow revenue.

For example, let’s take the CFO Centre (CFOC).

How customers get value: CFOC provides highly experienced CFOs to SMEs on a part-time basis.

Grow NSM: the number of active clients

Downsides: CFOC needs to be able to service active clients and this is directly related to number of CFOs

Keep it simple: CFOC wants every SME to have access to a part-time CFO.

This is a big hairy audacious goal. We understand that the number of clients is limited by the number of CFOs but a North Star Metric isn’t necessarily pragmatic or utilitarian. It does, however, provide a direction for the SME and the business owner.

What is the North Star Framework?

In addition to the metric, the North Star Framework includes a set of key inputs that collectively act as factors that produce the metric. Product teams can directly influence these inputs with their day-to-day work.

This combination of metric and inputs serves three critical purposes in any company:

  1. It helps prioritise and accelerate informed, but decentralised, decision-making.
  2. It helps teams align and communicate.
  3. It enables teams to focus on impact and sustainable, product-led growth.

Personally, I would add to this:

Imagine you have your North Star Metric, next you define sub-metrics (break down big goal to smaller goals), define the outputs (key elements of success) of those goals, define how you will achieve those outputs (needs to be measurable) and finally, what are the inputs to reach the outputs.

The CFOC question

At the CFO Centre, we ask our clients: what do you want your business to do for you?

This is an important question as our goal is to build a relationship with a business owner and the questions starts our journey to better understand what is important to them.

The answer to this question can also be the basis of your North Star.

Is the North Star relevant to SMEs?

Overall, I like the concept of setting a North Star for a business but I much prefer the more basic approach: Big Hairy Audacious Goal.

I was in conversation with one business owner who had his North Star, or rather his Big Hairy Audacious Goal. He wants his business to be valued at $1bn by 2029. I thought this was brilliant and I think this is what North Stars are about.

Set your big goal but remember, it is more about the journey than the destination!

Final words

To qualify as a “North Star,” a metric must do three things: lead to revenue, reflect customer value, and measure progress.

Make it bold, tap into your dream and start the journey.

 

Sources:

Types of Goal Setting – From North Star Goals to SMART to Bullet Journals – Leanne Calderwood; The North Star Approach to Goal Setting | by Patrick Ewers | Better Humans; What is a North Star metric? | Mixpanel; About the North Star Framework – Amplitude; North Star Metric: What Is It and How To Find It For Your Company – Kissmetrics; How To Find Your Company’s North Star Metric (forbes.com); Finding the Right North Star Metric | by Sean Ellis | Growth Hackers; What is the North Star Metric? Theory, benefits and examples | toolshero; What is the North Star for your Strategic Planning? | Insigniam Quarterly; Strategic guardrails for digital transformation | Deloitte Insights

 

 

Tips for the Manufacturing Sector

Tips for the Manufacturing Sector

Manufacturing Tips – Let’s take a step back….and go back to basics: Production Scheduling!

The last 12-18 odd months has been a time for many people to self-reflect. So why not apply this logic to your business?

We are often creatures of habit and do many tasks out of routine, but do not look behind the curtain.

There are literally dozens of articles on the internet and in business magazines on manufacturing financial tips, or top tips  to improve your business fast. Everyone starts throwing out the buzz words like: cash flow; inventory management; procurement savings; marketing and e-commerce and better working capital management, the lists goes on.

For most business owners, your eyes have already started to glaze over. Or, you’ve just clicked the close button on the internet browser. I did on several of the online articles I googled!

In other words, in my experience, you need to take a few steps back and go back to basics.

Look behind the curtain and optimise your production schedule.

Step 1.

Identify the key product (Group A) that your business manufactures and sells. What do you want the market to know you as? What is the goal? Is it to increase the productivity of product X and increase sales by X percent?

Step 2.

Secondly, you can consider looking at the other products (Group B, C, D etc) that your business manufactures and sells. What is the goal with these products? Ask the questions for this step that you asked in step 1 for your key product.

Step 3.

Thirdly, analyse the volumes of these product lines and determine what your realistic manufacturing capabilities are (with and without overtime, additional shifts, equipment change overs if required, etc). Do the calculations! If you are not sure how to do the analysis, get some outside talent to assist on a short-term basis.

Step 4.

As a next step, develop the production schedule. With Group A as your primary production, you can factor in peak sales periods and additionally, in “quieter times”, you can manufacture the other products (Group B, C, D etc). Remember to factor in equipment change overs and maintenance requirements, and consider warehousing constraints for raw materials and storing of finished goods.

Graphical Example of Production Schedule:

Production schedule graph

Step 5.

Setting the production schedule flows to your procurement requirements and timing and as a result, this then follows onto your inventory management. These two areas are driven by your production schedule (not the other way around!).

Golden rule:  Do not change the schedule!!! You may need to tweak and adjust for the unexpected, however, chopping and changing the schedule can cause productivity losses and create instability in the organisation.

Step 6.

To manage the manufacturing process from end to end, you need timely reporting and metrics to track the performance.  After that, review the reports regularly – some might be hourly, daily, every 2-3 days, weekly or monthly (just depends on your operations).

If your current software system cannot meet the reporting requirement, develop reports that meet your business needs. If you do not have resources internally to develop the reporting, get short-term outside talent.

Longer term, you may need to look at upgrading your software system that grows with your business needs. Think strategically!

Step 7.

Lastly, communicate the production schedule to your organisation. Set the expectations, from the team members on the production floor through to finance, customer service and sales. You’ll find over time that the salespeople that understand the production schedule and work with it, tend to be more successful in sales and meet customer expectations.

Once you are in the rhythm of the production schedule you can work on cost and waste reduction programs. For instance, refining your inventory management, supplier reviews, productivity efficiencies and so on.

In conclusion, go back to basics, break it down into steps and do not be afraid to ask for help.

By Melissa Tirant, Chief Financial Officer, Victoria – The CFO Centre

Freedom – The Main Reason I got into my Business

Freedom – The Main Reason I got into my Business

“Freedom” is the most common reason small business owners started their businesses.

41% of respondents to a recent poll conducted by The CFO Centre Australia identified this as their primary reason.

When I started my business in 2003 I had this desire to be master of my own destiny.

And family was always the primary motivation for this freedom. A desire to be with my young family in their formative years. To share those sporting and other important moments as my children grew up.

But in my work as a CFO working with small business owners, the dream of being independent can often be just that – a dream.

The reality for many owners is they spend most of their time fighting fires. And working longer and longer hours as the business grows. Instead of getting more time with their loved ones, the demands on their time increases and they are at home less.

Business owners are often very good at working on the tools but lack the expertise in other critical skills. Without the business acumen or financial background to know what’s best for the business, they work longer hours trying to do it all.

What do you really want your business to do for you?

Does your business provide the freedom that you expected when you first set it up?

Are you stuck in the operational space with little time left over for what you really want to be doing, both in the business and personally?

I’ve seen this time and time again with business owners that we have worked with. At The CFO Centre we help business owners see the big picture.

This 2 minute video  (click the big pink play button) shows some of our clients’ stories – from where they were to where they are now.

Written by Peter Crewe-Brown – CFO at The CFO Centre – Sydney Team.

Growing a Business

Growing a Business

A client recently said to me: “I want to grow our business and stop the cash burn – how do we do this? When is it the right time to invest and grow?”

What a tough question to answer. Each business is at a different stage.

We spent a day examining his business and determining what the growing pains were. He had started the business a few years ago and it grew from scratch to $750k turnover last financial year. This year they may potentially reach a turnover of $1.2m.

It was generating a great turnover and growing but they never had any cash.

“Why?” he asked.

After reviewing the business financials it was quite clear that the internal systems were not in place. He could not possibly understand the profitability of the products they were selling due to these inadequate systems.

Therefore they could not take the next step.

The first question I asked was: “Where do you want to take this business – what’s your goal? To build up the business and exit down the line, or are you looking to exit now? Or is this business a keeper if we can generate a great RoI?”

The response was: “We don’t know the numbers or where this business could get too as we have no clarity on the numbers”.

Something I see very commonly here in the SME businesses I work with – no clarity around the financials.

Next Steps

Step one for this particular client was to build a reporting framework around their products to determine what was profitable and what as not. If there were non profitable products (or those that deliver little profitability), should we dump them or only include them bundles in the online offering?

Step two: Build a fully flexible 3-way financial model (P&L, Cash Flow and Balance Sheet) for the next 3 years. Play around with the assumptions, i.e what other products can we put into the offering to customers?

Step three: Monthly reviews against the plan – what worked, what didn’t work and the whys around both.

The right time for a business to grow is when they can balance new customer demand with their internal systems and processes. Moreover, in the instance of this client, increasing recurring revenue streams. Growing faster generally costs more per customer as they need to engage more expensive channels within the business model.

Scalability is about continuing to engage customers with new offerings, and to engage new customers with your offering to the market.

To scale a business one must consider how the business model will affect the bottom line when you expand operations. If you have low capital expenditure and can grow your business with the same revenue / expense % it is much easier to deliver greater numbers in the long term and provide greater options to your customers.

It is early days working with this client but the potential is endless.

The 5 Key Threats to Australian Wineries

The 5 Key Threats to Australian Wineries
  1. ONGOING DEMOGRAPHIC SHIFT

Baby boomer’s wine purchases will diminish as they continue to leave the workforce. Unfortunately, research indicates that younger consumers are not picking up the spending baton to replace boomer’s wine spending power. Thanks to high house prices, GFC career interruptions, the craft beer and spirit loving Generation X are more frugal and less engaged with wine. Wineries must engage more with younger customers…ignore them at your peril…they will soon outnumber boomers.

 

  1. COVID INFLICTED DAMAGE TO CELLAR DOOR & RESTAURANT SALES

For smaller wineries, on-premise direct sales not only make up a large portion of sales, but are at a higher profit margin than wholesale sales. Additionally, on-premise activity is often where wine club members (similarly profitable) are recruited. Reduction in this activity from COVID travel restrictions will deal a disproportionately heavy financial blow. These sales will likely take years to recover to pre COVID levels. To remain viable wineries must compensate this financial loss.

 

  1. TRADE UNCERTAINTY

Globalisation has peaked and countries are now becoming increasingly protective. Result is Australia – China geopolitical “trade war”. At risk for Australia is its largest wine export market, China, valued at $1.2billion or 42% of exports. By comparison, New Zealand’s biggest export market (USA) represents 32% of exports value (and interestingly China at 1%). Comparatively Australia is at high risk  from China trade tensions, but increasingly as countries become more protective there should not be an over reliance on any single country.  Wineries should review and balance geographic sales portfolios.

 

  1. COVID CATALYST to E-COMMERCE

COVID has accelerated the use of e-commerce. The danger for smaller wineries is that the bigger players will increasingly dominate the off-premises e-commerce channels. Although these channels are not as profitable as direct to consumer channels, they should not be ignored. They balance the channel/mix risk, and it’s not clear now how they may develop. As e-commerce develop it is possible that separate channels may evolve that are better suited for smaller wineries. McKinsey believe that different partners will create “inter-connected service platforms” – in this context for wineries it could be partnering on a food or tourism platform. Wineries should monitor market development and enter into appropriate e-commerce sectors and platforms.

 

  1. CHANGING VALUES

Increasingly, accelerated by COVID, and the underlying demographic shift, wine attitudes, values and tastes are definitely changing.

Tipple of choice: Total alcohol sales are little changed in USA, but craft beer and premium spirits are increasing. In Australia alcohol sales are generally declining with perhaps the exception being spirits. These trends are probably largely driven by younger consumers who see the attractive benefits in the cost advantage, brand personality, and ease of understanding and storing these drinks.

Ecological/sustainability: This is becoming increasingly important for consumers. Many wineries, including world leaders, are switching to organic or biodynamic practices.

Health: There does not appear (yet) to be a full blown health driven turn away from alcohol, with overall consumption trends being more driven by demographics change. But perhaps, as NZ is doing, researching and promoting lower alcohol wine may have merit.

Packaging: In USA, 2019, different research has shown decreases in standard 750ml wine bottles, but increases in 375ml, 500ml, 3 litres, premium bag-in-a-box, cans and Tetra Paks. These changes reflect preferences and lifestyles of the changing demographics. But COVID driven changes, e.g. increased food take-aways, may well accelerate these trends.

Community/Purpose: For younger consumers, helping and connecting with local community is an important consideration influencing buying decisions.

Wineries should not ignore these trends.  The impact on these trends need to be understood and dealt with accordingly. Practical hints to follow in part 2.

Gary Campbell is a Principal for the CFO Centre based in Victoria. He is a chartered accountant, an MBA, has a passion for wine, formal wine qualifications, and advises winery (and other sector) clients. See Gary’s profile here

Under the Spotlight – The Operator

Under the Spotlight – The Operator

The CFO as an ‘Operator’

  • Ownership of Cash flow
  • Maximisation of Profits and Profitability
  • Reduce Costs
  • Increase Productivity & Efficiency

If cash used to be King, in today’s new landscape it’s now Emperor. The Operator frees up the Business Owner from having to worry about the day to day financial operations. Your CFO will ensure that your business is built on rock solid foundations and able to withstand unforeseen market conditions. Cash has always been critical to every business, however now more so than ever. Your CFO will help (re)structure your business to maximise your cash position. This involves balancing supply and demand while cutting back unnecessary costs and improving productivity, efficiencies and ultimately profit.

Being thought of as the Operator may not be the first role that a small business owner would think of for their CFO. In his recent blog, my colleague from The CFO Centre – Dr. Andre Van Zyl set out The Strategist role that a CFO often fills. While that role is critical for any organisation’s long-term existence, CFOs also have vast tactical experience in an Operator role. We are obviously not referring to operating a factory floor machine. We mean that the CFO has the ability and experience to oversee and operate a number of critical functions. A calm and reassuring Operator may be key to a company’s future.

Business frustrations

Time, or the lack of it, is so often cited by small business owners as one of their biggest frustrations. Our CFO Centre clients often comment that they are spending so much time working in-the-business that they can’t spend enough time on-the-business. A Part-time CFO who works closely with a small business owner can free up time for the owner by sharing the load. This ensures the owner is as fully focused on those very client or customer facing roles that were the initial catalyst for creating the business. This can be a significant ‘value add’ aspect of the Operator role of a CFO.

By the very nature of the CFO role, all our CFOs have either worked their way up through, or had executive responsibility for, the Finance functions in various organisations. They deeply understand the importance of running a tightly controlled organisation, with specific focus on cash flow management, profitability, and productivity. Andre wrote about developing three-way financial forecasting models which are critical for banks and financiers. It is just as important to deliver against those models.

The last two years have forced many businesses to consider whether current business models can survive, will survive, or even should survive. Critical decisions may need to be made on products or business lines to either scale-up, maintain status quo levels, scale-down or even shut-down completely. A part-time CFO can help small business owners as they work through that exercise.

A new or refined operating rhythm may therefore need to be designed, which may require minor tweaking or more major restructuring. Consideration of this may be critical for survival. The Operator who has extensive business experience will greatly assist with a rapid transition to a new business model. Central to this will be the robust and disciplined forecasting exercise – with potentially a myopic focus on Cash Flow management.

Part-time CFOs from The CFO Centre have the relevant experience required to assist business owners navigate through their growth journey.

 

Written by John Paterson, Principal (NSW) – The CFO Centre.